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In a welcome bit of good news for lenders, U.S. District Court Judge Gold (Southern District of Florida) reversed the portion of the 2009 bankruptcy court decision in the TOUSA, Inc. bankruptcy cases that had ordered the disgorgement of $403 million plus interest based on the holding that the amounts were received by certain lenders to the TOUSA parent in connection with a pre-petition transaction that constituted a fraudulent transfer. In the same decision, the bankruptcy court also ordered, among other things, (i) the avoidance of obligations, including liens, incurred by certain of the TOUSA subsidiaries (the “Conveying Subsidiaries”) under a $200 million first lien facility (the “First Lien Facility”) and a $300 million second lien facility (the “Second Lien Facility”) and (ii) the disgorgement of principal, interest, and fees paid to the lenders under the First Lien Facility and the Second Lien Facility, but these rulings are the subject of a separate pending appeal.

The bankruptcy court’s ruling raised a number of troubling issues for commercial lenders, including, but not limited to, the judge calling into question the enforceability of fraudulent conveyance “savings clauses,” common in commercial loan agreements.

TOUSA, Inc. and its subsidiaries designed, built, and marketed homes under a variety of brand names. In June 2005, TOUSA entered into a joint venture to acquire certain properties owned by Transeastern Properties, Inc. in Florida. To fund the purchase of the Transeastern Properties, TOUSA and its joint venture subsidiary entered into a credit agreement (the “Transeastern Loan”) for third-party funding with certain lenders (the “Transeastern Lenders”). The Conveying Subsidiaries were not parties to the Transeastern Loan, nor did they execute guarantees for the benefit of, or pledge collateral to, the Transeastern Lenders. With the turn in the housing market, the joint venture ran into hard times, and litigation ensued between TOUSA and the Transeastern Lenders.

TOUSA then entered into a settlement agreement with, among others, the Transeastern Lenders by which TOUSA agreed to pay approximately $420 million to the Transeastern Lenders (the “Transeastern Settlement”). To fund the Transeastern Settlement, TOUSA and the Conveying Subsidiaries, as borrowers, entered into the First Lien Facility and the Second Lien Facility (together, the “New Loans” from the “New Lenders”).¹ The Conveying Subsidiaries were neither obligated under the Transeastern Loan nor parties to the litigation between TOUSA and the Transeastern Lenders. On July 31, 2007, approximately $426 million of proceeds of the New Loans were paid to the Transeastern Lenders (together with the New Loans, the “July 31 Transaction”). The Conveying Subsidiaries pledged substantially all of their assets to secure repayment of the New Loans, but the Conveying Subsidiaries did not receive any of the proceeds advanced under the July 31 Transaction.

On January 28, 2008, TOUSA and the Conveying Subsidiaries filed for bankruptcy protection, and the creditors’ committee commenced an adversary proceeding seeking to unwind the Conveying Subsidiaries’ obligations under the July 31 Transaction and to recover the more than $420 million paid to the Transeastern Lenders. In a 182-page opinion, the bankruptcy court judge found, among other things, (i) that the Conveying Subsidiaries were insolvent at the time of, or rendered insolvent by, the July 31 Transaction, (ii) that the Conveying Subsidiaries were left with unreasonably small capital as a result of the July 31 Transaction, and (iii) that the July 31 Transaction could be avoided as a fraudulent transfer because the Conveying Subsidiaries did not receive reasonably equivalent value in exchange for the obligations incurred and liens granted by the Conveying Subsidiaries under the July 31 Transaction. In addition to having to return the monies received on July 31, 2007, the Transeastern Lenders were also required to pay prejudgment interest for a total disgorgement of more than $480 million.

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